This year, there has been a concerted effort among Bitcoin mining pools and facilities based in North America to contribute a higher proportion of the Bitcoin network’s overall hash rate from the continent, providing critical decentralization to this system. But this has not been without its challenges. The Bitcoin mining environment is one with high costs and a challenging supply chain.
To help buoy these North American entrants, Bitcoin-focused companies are playing a role typically filled by mainstream financial institutions like banks, carving out a new niche in providing financial advice and services to the fledgling North American mining industry.
The Financial Challenges Of Bitcoin Mining
Despite the steady increase in the price of bitcoin this year, miners are not necessarily benefiting, as intense competition forces the difficulty rate higher and the race for block rewards becomes more intense.
"The difficulty adjustment algorithm and bitcoin price act as a natural hedge for mining,”
Ethan Vera, cofounder of the globally-distributed mining pool Luxor, told Bitcoin Magazine. “When the price is up, you make less bitcoin as a reward. So, if you are mining on a bitcoin-denominated basis or have hedged only your bitcoin price, the risk profile is actually higher."
Many mining companies need new equipment or need to upgrade to newer models of ASICs, like Bitmain’s Antminer S19 pro or MicroBT’s Whatsminer M30S++, in order to be competitive in this landscape. But there’s a shortage of this updated mining equipment.
“Bulk preorders for the most powerful bitcoin mining hardware from major manufacturers are already queued up until May next year, suggesting an increasing level of institutionalized demand for such equipment,” The Blockrecently reported. “The overall supply shortage follow bitcoin’s price jump since Q3 this year, and is due to both an increase in institutionalized demand for bitcoin mining equipment and the limited wafer capacity from Bitmain’s and MicroBT’s silicon providers.”
As of this writing, Bitmain's official website shows that its flagship S19 Pro is no longer available.
New Solutions To Ongoing Challenges
Among these financial challenges, a growing number of Bitcoin mining companies are becoming open and transparent about their operations, a departure from what has largely been an opaque industry.
“There are disadvantages to letting everybody know what you’re doing, but it’s also a benefit,” Merrick Okamoto, CEO of mining company Marathon, told the audience at a recent mining conference. “It gives us unique access to capital markets. We’ve done two financings in the last year.”
A number of companies in the cryptocurrency space are positioning themselves to offer financial services to mining companies looking for a foothold in the industry, providing capital for new equipment, advising on best investments and timing and helping them to manage risk.
For instance, DCG Foundry, a subsidiary of cryptocurrency-focused venture capital company Digital Currency Group, was founded in 2019 to provide capital and intelligence to North American digital asset businesses. The company currently offers three services for the mining ecosystem: equipment financing and procurement, mining and staking and consulting and advisory services.
Ryan Porter, of Bitcoin-focused financial services firm BitOoda, is a Financial Industry Regulatory Authority- (FINRA) registered securities and derivatives broker. He explained to Bitcoin Magazine that mining operations have approached him looking for a variety of financial services, including raising capital to buy mining equipment and signing long-term contracts with power providers.
“These companies are still largely shut out from the banks,” Porter said. “If they want to raise debt financing to purchase equipment or build out their site, that capital now is coming from private equity or family offices or through the use of financial products like our hash power contract. Where firms like ours are helpful is taking these mining companies from idea, to site selection, to construction, power advisory, financing, equipment procurement and then, when they are operational, the financial optimization of the facility.”
As more groups move forward with the goal of contributing to one of Bitcoin’s most critical industries from North America, fundamental financial services offered by these bitcoin-focused groups and others appear to be a key aspect of strengthening mining decentralization.